Death and taxes... how to minimise one of them

WITH the end of the current tax year close upon us, HM Revenue & Customs are once again rubbing their hands with glee.

Especially given the pandemic has meant many people haven’t spent as much as they might have done in the past, lockdowns forcing the cancellation of holidays and leisure pursuits, meaning there may be surplus money sloshing about!

However, in the hope of helping you keep more of your hard-earned cash, and to provide sufficient warning to enable you to do something about it, here are a few suggestions, as indeed we offer every year, for how best to shape your finances accordingly.

The cut-off is April 5 and having, no doubt, recently finalised your self-assessment for the last tax year, you may wish to make the most of some of those allowances and tax reliefs which may be lost come the 6th. The annual allowance for pension contributions remains at £40,000. For every £80 contribution from a basic rate taxpayer the Government will add £20 whilst for a higher rate taxpayer, each contribution of £100 costs £60 as a result of the additional relief applied.

However, for some high earners, the allowance is ‘tapered’ according to your income, down to £4,000.

The taper for 2021/22 cuts in at £240,000-plus whereupon you have a calculation to make as to the amount you could tax-efficiently invest in your pension.

Some higher rate taxpayer with gains exceeding this year’s allowance, who have access to a company pension scheme where tax relief is provided “at source”, could consider making an ad hoc pension contribution to reduce their earnings sufficiently below the higher rate threshold and so their tax liability

Turning to child benefit, what you receive reduces by one per cent for every £100 the highest earner in the household’s annual income exceeds £50,000 a year. Hence, where earnings top £60,000 you lose out entirely. One way of retaining this valuable concession would be to make a pension contribution, thereby reducing those earnings.

Next on the list is the dividend tax-free allowance of £2,000.

Married couples should consider transferring assets between themselves in order to enable both to maximise this significant opportunity, particularly where one spouse pays income tax at a lower or nil rate.

The capital gains tax annual allowance is £12,300 per person – if it is not used prior to April 6, it will be forfeited. So, individuals should look to crystallise any gains up to that figure from any non-ISA investments. Again, spouses would benefit by transferring assets between each other to maximise their individual allowances.

And, while we are mentioning ISAs, up to £20,000 per person can be invested within an ISA prior to April 6 where there is no tax liability on any interest earned and no income tax or capital gains tax liability on any future income/ withdrawals. Consider also inheritance tax exemptions – any individual is able to gift up to £3,000 in any tax year.

Equally, you can make as many individual “small gifts” of £250 as you wish. For example, someone with 12 grandchildren could give each of them £250 annually as a birthday present and it would not be counted as part of the estate.

You can also give away money from income without having to pay tax as long as it doesn’t affect your lifestyle. You might have difficulty convincing HMRC who keep a watchful eye over the legitimacy of such arrangements, but it can certainly be done.

The best of luck then in your endeavours. Finally, always remember Benjamin Franklin’s famous quote that nothing is certain except death and taxes.